Carry Trade Trends Breaking- SMELLS LIKE PANIC

I don't want to get too far ahead of myself, but so far it looks like what we've been expecting and especially recently in looking for a FAIL appears to be taking shape.

If you recall Friday and some slight positive signals developing and us just not wanting to have anything to do with it as a different perspective gave a different view of the market in which I felt like this is an "AAPL Environment", which is to say, divergences get run over and that happens when the herd breaks up, the Wall St. herd and they start going in to survival mode, "Every man for himself" and "He who sells first, sells best".

The longer term indications we've been watching for such as the carry trades are now in play, those red flags are up and last night's initial break has thus far held, changing the USD/JPY trend, in fact I believe Bank of America/ML just released some commentary on the USD/JPY carry having broken its trend. This is why we've been so keen on the carry trades because they are the leverage institutional money uses and they are also a double edged sword. While they are extremely useful in leveraging up their assets under management (AUM), these trades generally run at 100:1 leverage or at minimum 10:1 so once they get to a point in which the trade is losing money, every pip the currency moves against them is like a full 100 pips, so you can see why it becomes a very dangerous situation very quickly.

Here are some of the charts inferring a panic has broken out just as we suspected last week, especially Friday. However, I'd urge you to stay calm, not to chase things, most of you have positions set up and there will be chances to add more, it's important that you don't get pulled in to this market hysteria and let greed enter the emotional mix. Volatility in both directions will pick up and it's important you be able to look at the market objectively and pick and chose your battles. 

 This is what I pointed out last night, the May highs in USD/JPY (one of the 3 carry trades and an important one) were taken out last night, I wasn't sure if it was going to hold, but the message had been sent, the trend (UP) just changed. Remember what I said about the right side of a formation like this and all the examples from late Friday, it tends to fall much faster than it rises, BUT the counter trend rallies in a move on the downside can be monstrous, luckily I think we'll be able to spot them fairly easily and even trade them as they too will produce superior gains in a short period of time.

 These are the 3 big drops since Friday, one Sunday and one this morning, but the punchline is the May high is taken out.

EUR/JPY has a different chart structure so a trend change here will take a different form, it will be in lower highs/lower lows, but it appears that Jan. 2 was a pivot.

 The pair on a 5 min chart, these are the lower highs/lower lows on a shorter term basis, but this is a start. Don't be surprised to see volatile reactions in the other direction, I think we'll be able to spot them more easily than over the last year, but we'll see as we get to that bridge, if so, then it should be very exciting.

 The 30 min Yen chart which was positive off the NY lows and continues to look strong.

The 5 min is a little messy, we could get a short term change here, it's not in yet, but the fall from clean confirmation is there now.

ES reacting

NQ reaction... Note the divergence FAIL, this is what I was , well not afraid of, but what I suspected would be the case at an increased probability and therefore wasn't willing to take the same hedge risks that were taken just a week ago.

VIX futures are a very important timing key, the fact they were so aggressively knocking them down on Friday and pumping HYG seemed to be evidence that there was an attempt to create a bounce, but when you have to resort to all tricks as this market has been doing for nearly every move, you know there's no underlying strength and there's trouble below the surface, that's why it's important to monitor these things and most traders are too busy watching moving averages and Fib levels to even know about these leading assets.

VXX is already in good position, it was the short term flag I was looking for and...

Multiple timeframes are seeing these vertical divergences building in the last few hours.

Whether we get more of a broad base or not (even though it would still be small considering the preceding trend) will tell us a lot about how deep we are in to the panic.


As we saw all day today, the charts just kept getting worse in the averages until we got a FAIL.

 IWM 5 min turns really negative after Window dressing as we were noticing at the time (changes in character).

Intraday, the leading negative divegrence is a fail, but we still want to be judicious in positions and continuing analysis, there can be a lot of volatility that will make you doubt what you believe, that's the market's job, that's why patience and objectivity are key right now.

QQQ 1 min total fail of the bounce attempt

QQQ 5 min also fail

SPY 5 min (and other timeframes) just a strong leading negative forming quickly.

Motion here is our friend, both directions, it gives us information, it gives us timing, probabilities and trade opportunities.

Market Update

This is exactly why I had no interest in considering a long Friday (I might have considered it today if the signals were lining up) and why I wasn't even interested in hedging the trading shorts. The market has some very nasty cracks in place, it seems like in every asset EXCEPT the averages *which is why it is even more deceiving and deceptive) we are coming down off the right side of what I'd call the pivot or absolute top.

Being involved in market correlated longs right now for me requires a high degree of evidence because of this situation.

My earlier update reflected damage already occurring and now it's getting even worse. It is still mid day and a lot can still happen, but this is just nit looking very good.

 SPY 5 min chart losing quite a bit of ground considering the timeframe and that it's all occurring today. There's a mini H&S in place as well today.

 The 30 and 60 min charts are what I was talking about last night as really standing out, remember that about half of that leading negative on 30 and 60 min charts was done in one day and not in the low volume of Christmas time, but after the New Year.

To better illustrate what I mean...

 For a cycle things make sense going from accumulation to confirmation and then to a distribution area in December before the market popped once again. It's in that pop that honestly looks to be about the right size for the "Igloo/Chimney" shape top, that we find an incredibly strong leading negative, as I said before, searching back as far as I can go, I can't find anything as dramatic. The first negative you can see on the chart above this one at the first red arrow would normally be more than enough to turn a cycle this big down so what we have to the right of that is pretty extreme even among very extreme standards. If you follow the continuity of the 3C line I drew in, you can see the natural process and the abrupt change, this is not normal, what we have to the left at the first negative divegrence is normal, this is extreme.

This is a longer view of the APY 4 hour chart.

There are a few different reasons I show it, one is to give you a feel for what's going on with the probabilities, where this market is almost certainly going, but also when you have charts this ugly through out the longer timeframes, it means the chances of the shorter timeframes that are running counter to these signals (positive divergences) have much less of a chance of holding together.

This is the same concept as, "A bullish triangle works a lot better in a bull market and virtually doesn't work at all in a bear market", the longer term probabilities do effect the probabilities of shorter term charts. It's just like anything else, if you have a big boss that's in a foul mood, the probability is that the worker bees under him are not going to be in the best mood either.

TBT Trade Idea...

As mentioned last night, the 30 year Treasury futures look like they'll see a near term pullback. That would include the 20+ year bond fund TLT so TBT (long) is a position that works for playing that pullback (it's the inverse of TLT with 2x leverage.).

This TBT idea would really be a trade only.

 TLT 1 min and 2 min above are negative from in line.

 There's migration to the 3 min chart

And to the 5 min chart, this is essentially where it stops and thus why I say a trade only, but with TBT's 2x leverage, it can still be worthwhile.

TBT is positive through the intraday charts confirming TLT signals, this is the 5 min where we left off with TLT above.

Even the 10 min is positive, it's hard to make a case much beyond 10 min and when we get in to 30 and 60 min, TLT is clearly still in very strong position so a pullback would be useful for entering a longer term TLT long position.

I'm going to hold off on TBT at the moment just because I'm considering TBT and MCP and likely some others soon,. As I'm trying to keep the trading portfolio realistic and not have more positions than I'd normally have in it, I want to make sure which ever way I go, it looks to be the most bang for the buck, however both look good, but both are in need of just a little more work, I think MCP is further along, but it also seems to be a bigger move we are looking at there so they may be ready at the same time.

Market Update

Initial impressions are there's a bit more weakness than I expected, although it is still early in the day and the week, still I can't ignore what's popping up and need to keep an eye on the situation.

The TICK Index has been mellow again today, pretty much in the =/- 750 range which is quite mellow.

It's the divergences that are interesting.

 The IWM 1 min is a bit different, but this is the shortest timeframe, it is slightly positive intraday.

However at 2 mins there's a negative trend developing.

QQQ 1 min intraday is a bit surprising.

The 2 min chart is seeing migration as well. You can see Friday's positive divegrence I mentioned, it's not very big and proportionally, the current negative is almost about where I'd normally expect, not accounting for the market's tendency to go more extreme than what seems reasonable, still, the divergence is there and apparently growing.

 This is a QQQ 5 min chart, you can see the negative trend right on this move off Friday's lows.

For some perspective, this is the same chart as above, just zoomed out a bit so the weakness is more than just intraday.

SPY 2 min today

And this is a kind of surprising, fast 3 min leading negative divegrence in the SPY, ALL of it from TODAY ALONE.

I'm also watching the VIX futures as they seem to be one of the more important timing cues, we don't have any screaming signals as it was apparent they were pushing ti down Friday, but there's at least a start in VIX futures, 1 min.

Intraday VIX futures going positive intraday 1 min

Obviously worth keeping a close eye on considering what I was talking about Friday as this looking like a very slippery slope and a such, dangerous or very profitable on the right "slip".

MCP Update / Possible New Trade Entry.

MCP has been an active stock for us this month. Thursday, January 2nd I took off the second half of the MCP trading position which was great timing as CNBC's fast money had just done a fluff piece on it, that was a gain of about +32%.

I said I was leaving the core long position in place and also later opened a January $5 Call position, I've been waiting for a new opportunity to go long MCP in the trading portfolio and I think that is coming up.

There are some changes in character since the pullback toward the November/December base breakout area and I think MCP is putting itself back together again. In fact, I'm very close to opening at least a partial trading long, I'm just looking for a chart or two to give a better timing signal, but I think the area is just about right, other than the always probable head-fake move at the bottom of an upside reversal.

 You can see the November/December base and breakout which is low in a much larger base MCP has been putting together. The bigger the base, the more support there is for a strage 2 trend so I really like MCP as a longer term position, likely a trending trade which is why I didn't want to touch core/trend long MCP positions, only trading ones.

 This is from the breakout of the Nov/Dec base to the pullback with a nice channel. I think I showed last week how a 2-day X-Over Chart fits the character of MCP and the pullback is to the 10 bar yellow moving average thus far a would normally be expected.

In the yellow box you can see the Rate of Change is falling off or just apply the indicator to price. We're starting to see more of a lateral reversal process which is great.

 The daily 3C chart and the full base is very impressive so I think this is a long that can work for quite a long time, we haven't even come near stage 2 yet.

This is the hourly chart so there's a huge divergence even locally on the smaller base, again, this is why MCP is one of my favorite long positions and as soon as the CNBC fluff piece came out, I knew it was time to get out for the short term, a day later we were pulling back, what's that tell you about CNBC?

 Intermediate, the 10 min chart was in good shape and on the pullback remains in good shape, this is what I want to see broadly to know that this is still strong, nothing has changed, but it's not effective for actual timing of a new position.

The 10 min chart is more detailed showing the area of distribution that led to the pullback, essentially right at the CNBC Fast Money mention (long-lovers) and the positive divegrence building since.

The 3 min chart is even more detailed, you can see the rounding/reversal process in to a leading positive divegrence, the 5 min chart looks EXACTLY the SAME so it appears there's migration from 3, 5 to 10 min with longer charts never having seen any damage.

This is really the only thing left, the intraday 1-2 min charts are in line, I'd like to see some sign that Specialists are stocking up for a move. We may see a head fake move of some sort which is typical of reversals and usually makes for a great entry.

In any case, I'd say we are real close to a new long trading position, an options position or even a core long position if you are interested. I'm guessing within a day (maybe today) to two or so, MCP should be good to go with new long entries.

TSO Trade Set-up Update

TSO was added as a possible trade, we were looking for a few things to happen as the triangle it is in matured and approached the apex, here's the initial post/idea from last Thursday.

So far TSO has made the first move we expected or were looking for to set up this trade which is one that comes to us on our terms, if it doesn't look right, nothing lost.

Here's the update so far as it seems to look exactly as we suspected it would. We still do need some stronger confirmation though given it's so early.

 This is the daily TSO chart, this is a real H&S top with a volatility shakeout of the shorts to the right and then a sym. triangle,  The trade idea is to look for a head fake move on the downside of the sym triangle and establish a long, if it gives us the confirmation needed. This should create a quick upside move which we'd have to keep an eye on as eventually it should fail and the H&S will be back in play which opens up a second and larger trade (short), but 1 step at a time.

 This is a 60 min chart of the triangle and the move below the triangle that we were expecting, now that move below needs to be verified as neither being accumulated in which case we have a long trade or something else in which case we may have a short trade, but I'd expect the long trade first and because of the head fake and so tight in the apex of the triangle, it should create a nice momentum trade.

 This is a closer look at the initial move below the triangle, we'd likely still need to see some sort of reversal process, probably tighter than normal.

The 5 min chart and others are what suggested this turn out to be a head fake long last week.

Thus far the intraday 1 min chart is confirming so we have a good start, we just need to see some of that reversal process as well as continued positive, confirming signals.

UNG/DGAZ Update

Friday in the UNG / DGAZ (long trade) update I said...

"Depending on how aggressive you are as a trader, UNG should see a bit more of a bounce and DGAZ a correction, I'm not going to get that aggressive in trying to trim around the bond and I'll leave positions the way they are."

You may also recall there was some talk in that post and analysis of the H&S top in UNG and Inverse H&S bottom in DGAZ and whether this bounce would act as the typical H&S top shakeout that we normally see associated with larger tops, which also happens to be the third and last place I'll short a H&S top, after the initial break under the neckline (Friday) and after a volatility shakeout of all new shorts on that initial break with a move back above the neckline where all of their stops are.

I'm still waiting for data on whether there's confirmation or distribution as it is early, but from Friday's post which is linked at the top of this one, the size and shape of the divergence/reversal area didn't look so large as to be much more than what was expected on Friday and even though I could have traded around it, I decided, as you'll see in the post, just to leave it alone and wait through it. I'm not sure what you did if you were in the trade, but we'll try to pick it up from here and it may in fact be a good entry in a short period of time in to DGAZ (long) if you missed the original idea and are interested.

So far from what I can see, it looks like a few stops have been hit just above the neckline, but nothing huge.

I still think the position is fine as I thought it would be on Friday, I'll show you why again.

 UNG daily H&S top, very small, but we still have the same volatility shakeout concept just barely in play with a move across the neckline where short (buy to cover) stops would be placed.

This is the move intraday on a 5 min chart so you can see the volume and roughly what a stop run would look like, not too impressive.

This is a fair representation of the divergence, it goes out further than 1 minute, but this is a good representation of the process.

 This 10 min UNG chart is what I'd call ""The lid on a bounce", it's negative and the reversal area was not that big nor the divergence, I doubt very much it was intended to be anything more than what it is or what we expected. I think there's still going to be a significant move (pullback) in UNG and up in DGAZ.

This is the 15 min DGAZ positive, it goes out even further, so there's a large process in place, again I think this is more evidence that this move we saw coming on Friday is about what we expected and whether you chose to trade around it or not is more of a personal decision than anything.

I'll update when I have more on today's intraday action.

A.M. Observations

There's really not much different than last night, it's still about the Carry Trades.

USD/JPY just got whacked again...

So we have a drop from 105+ Friday, another whack last night and one just this morning taking the pair down over 200 pips since Friday which is having an effect on Index futures with ES down approximately 7 points since's Friday's 4 pm print...

The Week Ahead

Good evening, I hope you had a great weekend, I'm pretty sure most of us deserve it.

Friday I closed out the week with some longer term charts of what the market looked like in several different markets across nearly a century, right at the top, they don't look much different than the market does now, but that's not proof of anything.

However, what seemed like an opaque market for an unusual amount of time last week, may indeed be the change of character that I have always thought would accompany a real trend chamge in the market, along the lines of a secular bear market which is something that I don't think anyone alive has traded, at least not in equities, there was one on commodities. I have maintained my opinion that, "Whoever figures out how to trade this market first, essentially wins" and with fear at the helm, the ferocity of a downside move can be one of the fastest ways to make money as I demonstrated with long term charts Friday linked above. Take the 2002/3-2007 Bull market, 5 years of building this bull and most of it was taken apart in 8 months, all of it was taken apart in a year and a half and then some.

I have long suspected this coming decline would be historic.I won't go in to all of the reasons, but if you consider what created this bull alone and how quickly (in terms of a primary trend) that situation (F_E_D liquidity) can and is ending, you have a recipe for a market that has never had any business up here and once the singular reason is gone or the perception is that it will be gone which is the market front running the F_E_D, things can get out of hand pretty quick as, once again I demonstrated with Friday's closing charts.

There was even a hint of a bounce building that I had no interest in either trying to trade or hedge against because the environment is just that dangerous. We will see what turns up early this week and make some decisions, but this is a time more than any for caution.

The flags I have been adamant about keeping an eye on including treasuries and most importantly, the carry trades are now getting to critical levels and tonight's futures are just a glimpse of that.

For now, I'm going to try to pick up on Friday's post with what we have in futures, especially the bellwethers that I have said over and over, "Watch these" as few others know to watch them and they are the alarm, the red flags. For 3C's part, the unique character that has been a dominant feature on the charts since the last week or so of December (actually much longer, but in more acute fashion) has been the speed and depth of leading negative divergences whether on 15, 30 or 60 min charts, they are some of the most vertical I can see going back historically and the deepest as well as the fastest forming, something certainly changes just as December/2013 window dressing finished and that's obvious in the start of January's trade.

The Yen has been a key asset as it is now the earliest signal in the all important carry trades which are a barometer of Institutional risk.

The Yen's daily 3C chart has an enormous leading positive divegrence, most of it was formed through 2013, especially around the time the BOJ embarked on their own QE.

Recently the Yen has started flashing shorter term like 30 min positives suggesting it was getting ready to break higher and higher it went causing carry traders losses.

Yen 30 min positive and a vertical move higher.

Right now it is in line (confirmation) in most timeframes (5, 15, 30 min.) While it's very vertical and could pullback (which according to what I saw later Friday a pullback in the Yen would make sense), it seems to be doing its damage.

For instance the EUR/JPY and USD/JPY were pretty normal through 2013 (at least relatively speaking), but that high Rate of Change in price just before a top became apparent in November.

 Daily EUR/JPY 3C chart, note the rate of change to the upside around November (yellow) in to a rare negative divegrence for FX pairs out this far right in to the New Year.

 The other carry pair, USD/JPY looks similar in all the important ways, but there's also a region of support that is part of classifying the FX pair's trend, a break below the May highs at $103.72 (if sustained) changes the bullish trend in the pair and is definitive evidence that something is changing for the worse.

Both carry pairs were clearly negative as of the New Year (remember the changes noticed as soon as December Window dressing ended).

We've has some steep moves recently to the downside in the USD/JPY, however on this 5 min chart you can see that as the new week's FX trade has opened, the pair has broken below that level of $103.72.

This first break may not hold, they usually don't and considering it's Sunday night futures, I wouldn't be surprised if it didn't, but it has made a move that is very important.

The 1 min EUR/JPY saw damage as well on the open of trade for the FX markets this week with a steep plunge, the 1 min 3C chart suggests a bounce as I suspect and mentioned above.

However it has left a bit of a mark on Index futures.

 NQ 1 min. while it's only a 1 min chart, Friday's late action and the action on the open today both suggested a move lower and I think it is directly connected to the FX/currency market and moves there.


1 min Russell 2000 futures look much the same.

As you know, I don't trust a 1 min chart's signal to hold overnight, but it is interesting that they seemed to pick up on trouble as the USD/JPY broke a level that would create a short to intermediate trend change which is something new for the pair that it hasn't seen in at least a year.

As we have seen, gold and silver have traded opposite the market and as you know I've been expecting a base in both and a move much higher, take a look at gold future's daily chart.

This is without a doubt, the strongest gold has looked since before 2011.

The flight to safety trade in Treasuries or at least select ones like 20+ year (TLT) has been a trend I've been following for months looking for the right entry, take a look at the 30 year which is different than the benchmark 10 year, we've noticed that from the start at least 6 months ago which is interesting in itself as Wall St. plans out much further than you'd ever expect.

 The daily 30 year Treasury futures which confirms what I've been watching for a longer time in TLT (20+ year treasuries) as I've been looking for the right time to open a core/trending position.

This is the 1 min overnight signal so a pullback looks probable, but the important part is how this asset has finally, after doing a lot of work, come in to its own and looks to be ready for a position which has far reaching implications for the market, it tells us a lot about the state of the equity market.

10 year futures don't have the daily positive and don't look as bullish as all. This is a 5 min chart and as you can see, it looks probable that treasuries pullback soon.

However the difference between a 30 year and a 10 year is important, the 10 year is a benchmark that sets all kinds of rates like mortgages. A 10 year that is not looking as good as a 30 year suggests that rates may be ready to rise and we have already seen them criss cross above the 3% level and down and back up, which is not good from an economic standpoint as most every interest rate including mortgages rises.

However it seems to be the bond traders that are moving it, they seem to be giving an authoritative vote of no confidence in the economy. The last time this happened with yields above 3% was when the QE taper was first mentioned last summer in such hawkish tone and you saw how the F_E_D backed right off as rates popped. The time before was July of 2011, just before the market dropped about 20% in a very short period.

I'm not much more concerned about overnight futures, I am interested to see what tomorrow brings and whether there's any position management or new trades to be entered. However will have a much, much higher standard for any hedges and even higher for any longs, the environment is just getting to dangerous for my comfort and I have a very high tolerance for risk, just not for irresponsible acts.

Here's the schedule of economic events for the week, again chock full of F_E_D speakers.

Like I said Friday, it seems like VIX futures are being pushed and HYG pumped, but not everyone is on board as Sentiment falls sharply on the close, HYG divergences are deep and Yields are negative relative to the SPX which has always been a great leading indicator.

I'll see you in a few hours...